Fixed Income Factors to Keep an Eye On
Hi this is Jeffrey Lapin. I'm a partner at Lord Abbett and I manage the bank loans and credit opportunity strategies here at the firm.
Title: Four fixed-income factors to keep an eye on
Right now, the loan team is focused on three aspects of the macro environment that I think most of my colleagues share. And then one specific to the loan market.
So the three that that are of concern to everybody in fixed income are: what is the fed is going to do, how is the economy going to perform, and then how are earnings going to be.
So on the Fed side, we expect that the Federal Market Open Committee will announce a schedule for tapering bond purchases sometime before the end of the year. The rates curve is already biased higher with a strong economy and pretty strong policy support. And we think that what this will indicate is that the economy is doing well enough that the Fed could start to remove accommodation. This will be positive for risk assets like loans.
On the economy, there is some concern about inflation, obviously, and then also whether we're going to dip into a lower growth period and maybe experienced some stagflation. We think that the better argument is for a reflationary boom, with growth picking up as the economy transitions away from Covid and the Fed begins to remove accommodation. But we will be watching things like the employment report, the inflation report, to see if that view holds water.
And then on earnings were coming up into an earnings period for Q4 and we expect Q4 in a couple of months. We want to see that companies are continuing to benefit from the economic uplift even, as some of their pricing inputs go up. Do they have pricing power? Can they sustain margins? Can they continue to grow and do well? And this will also provide an uplift for credit.
And then finally on the loan side specifically, we're looking at supply and demand in the in the space. So overall we've seen tremendous demand and loans this year through CLO formation, retail flows, and then overall people recognizing the relative value. This has been met with near record supply, but overall demand is overwhelmed supply creating a tailwind for the asset class. We want to make sure that that continues, or at the very least that supply is no worse than neutral as that will continue to provide an uplift for rates and prices.
Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.
Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.
No investing strategy can overcome all market volatility or guarantee future results.
The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.
Market forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.
Equity Investing Risks
The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies.
Fixed Income Investing Risks
The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Bonds may also be subject to other types of risk, such as call, credit, liquidity, and general market risks. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price.
The credit quality of fixed income securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness. Ratings range from ‘AAA’ (highest) to ‘D’ (lowest). Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.
This material may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.
The views and opinions expressed are as of the date of publication, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions and Lord Abbett disclaims any responsibility to update such views. Lord Abbett cannot be responsible for any direct or incidental loss incurred by applying any of the information offered.
This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. Please consult your investment professional for additional information concerning your specific situation.
Important Information for U.S. Investors
Lord Abbett mutual funds are distributed by Lord Abbett Distributor LLC.
FOR MORE INFORMATION ON ANY LORD ABBETT FUNDS, CONTACT YOUR INVESTMENT PROFESSIONAL OR LORD ABBETT DISTRIBUTOR LLC AT 888-522-2388, OR VISIT US AT LORDABBETT.COM FOR A PROSPECTUS WHICH CONTAINS IMPORTANT INFORMATION ABOUT A FUND'S INVESTMENT GOALS, SALES CHARGES, EXPENSES AND RISKS THAT AN INVESTOR SHOULD CONSIDER AND READ CAREFULLY BEFORE INVESTING.
The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems. The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.
Important Information for non-U.S. Investors
Note to Switzerland Investors: This is an advertising communication.
Note to European Investors: This communication is issued in the United Kingdom and distributed throughout Europe by Lord Abbett UK Ltd., a Private Limited Company registered in England and Wales under company number 10804287 with its registered office at Tallis House, 2 Tallis Street, Temple, London, United Kingdom, EC4Y 0AB. Lord Abbett UK Ltd (FRN 783356) is an Appointed Representative of Duff & Phelps Securities Ltd. (FRN 466588) which is authorised and regulated by the Financial Conduct Authority.
Copyright © 2021 Lord, Abbett & Co. LLC. All rights reserved. Lord Abbett mutual funds are distributed by Lord Abbett Distributor LLC.
This recording may not be reproduced in whole or in part or any form without the permission of Lord Abbett.